Without a sound and effective banking system in
India it cannot have a healthy economy. The banking system of India
should not only be hassle free but it should be able to meet new
challenges posed by the technology and any other external and internal
factors.
For the past three decades India's banking system has several
outstanding achievements to its credit. The most striking is its
extensive reach. It is no longer confined to only metropolitans or
cosmopolitans in India. In fact, Indian banking system has reached even
to the remote corners of the country. This is one of the main reason of
India's growth process.
The government's regular policy for Indian bank since 1969 has paid
rich dividends with the nationalisation of 14 major private banks of
India.
Not long ago, an account holder had to wait for hours at the bank
counters for getting a draft or for withdrawing his own money. Today, he
has a choice. Gone are days when the most efficient bank transferred
money from one branch to other in two days. Now it is simple as instant
messaging or dial a pizza. Money have become the order of the day.
The first bank in India, though conservative, was established in 1786.
From 1786 till today, the journey of Indian Banking System can be
segregated into three distinct phases. They are as mentioned below:
- Early phase from 1786 to 1969 of Indian Banks
- Nationalisation of Indian Banks and up to 1991 prior to Indian
banking sector Reforms.
- New phase of Indian Banking System with the advent of Indian
Financial & Banking Sector Reforms after 1991.
To make this write-up more explanatory, I prefix the scenario as
Phase I, Phase II and Phase III.
Phase I
The General Bank of India was set up in the year 1786. Next came Bank
of Hindustan and Bengal Bank. The East India Company established Bank of
Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as
independent units and called it Presidency Banks. These three banks were
amalgamated in 1920 and Imperial Bank of India was established which
started as private shareholders banks, mostly Europeans shareholders.
In 1865 Allahabad Bank was established and first time exclusively by
Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters
at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India,
Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set
up. Reserve Bank of India came in 1935.
During the first phase the growth was very slow and banks also
experienced periodic failures between 1913 and 1948. There were
approximately 1100 banks, mostly small. To streamline the functioning
and activities of commercial banks, the Government of India came up with
The Banking Companies Act, 1949 which was later changed to Banking
Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965).
Reserve Bank of India was vested with extensive powers for the
supervision of banking in india as the Central Banking Authority.
During those days public has lesser confidence in the banks. As an
aftermath deposit mobilisation was slow. Abreast of it the savings bank
facility provided by the Postal department was comparatively safer.
Moreover, funds were largely given to traders.
Phase II
Government took major steps in this Indian Banking Sector Reform after
independence. In 1955, it nationalised Imperial Bank of India with
extensive banking facilities on a large scale specially in rural and
semi-urban areas. It formed State Bank of india to act as the principal
agent of RBI and to handle banking transactions of the Union and State
Governments all over the country.
Seven banks forming subsidiary of State Bank of India was nationalised
in 1960 on 19th July, 1969, major process of nationalisation was carried
out. It was the effort of the then Prime Minister of India, Mrs. Indira
Gandhi. 14 major commercial banks in the country was nationalised.
Second phase of nationalisation Indian Banking Sector Reform was
carried out in 1980 with seven more banks. This step brought 80% of the
banking segment in India under Government ownership.
The following are the steps taken by the Government of India to
Regulate Banking Institutions in the Country:
- 1949 : Enactment of Banking Regulation Act.
- 1955 : Nationalisation of State Bank of India.
- 1959 : Nationalisation of SBI subsidiaries.
- 1961 : Insurance cover extended to deposits.
- 1969 : Nationalisation of 14 major banks.
- 1971 : Creation of credit guarantee corporation.
- 1975 : Creation of regional rural banks.
- 1980 : Nationalisation of seven banks with deposits over 200
crore.
After the nationalisation of banks, the branches of the public
sector bank India rose to approximately 800% in deposits and advances
took a huge jump by 11,000%.
Banking in the sunshine of Government ownership gave the public
implicit faith and immense confidence about the sustainability of these
institutions.
Phase III
This phase has introduced many more products and facilities in the
banking sector in its reforms measure. In 1991, under the chairmanship
of M Narasimham, a committee was set up by his name which worked for the
liberalisation of banking practices.
The country is flooded with foreign banks and their ATM stations.
Efforts are being put to give a satisfactory service to customers. Phone
banking and net banking is introduced. The entire system became more
convenient and swift. Time is given more importance than money.
The financial system of India has shown a great deal of resilience. It
is sheltered from any crisis triggered by any external macroeconomics
shock as other East Asian Countries suffered. This is all due to a
flexible exchange rate regime, the foreign reserves are high, the
capital account is not yet fully convertible, and banks and their
customers have limited foreign exchange exposure.
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